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3 Long-Short Mutual Funds to Counter the Market Volatility

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The continuous increase in interest rates by the Federal Reserve, initially aimed at controlling high inflation, has caused uneasiness in the market, considering that inflation levels remain above the Fed's 2% target. The recent suggestion by Fed Chair Jerome Powell for another rate hike further highlights the ongoing uncertainty surrounding the monetary policy.

The released meeting minutes reveal that while most participants believe another increase in the target federal funds rate is necessary, some argue against additional hikes. Since March 2022, the FOMC has raised its key interest rate 11 times, resulting in a targeted range of 5.25-5.5%, which is the highest level seen in over two decades.

The Labor Department's latest report revealed that in September, the producer price index (PPI) increased by 0.5%.This growth pushed the 12-month PPI rate to 2.2%, exceeding the target set by the Federal Reserve. Moreover, according to the Bureau of Labor Statistics, the Consumer Price Index (CPI) demonstrated a month-over-month increase of 0.4% and a year-over-year increase of 3.7%. In addition, when excluding volatile energy and food prices, the Core CPI rose by 0.3% on a monthly basis and showed a steady increase of 4.1% over 12 months.

At the same time, the Israel-Hamas conflict has led to global economic repercussions and market volatility. The impact on the market will depend on whether the conflict spreads to other parts of the Middle East. Iran, a significant oil producer and supporter of Hamas, could have a substantial long-term effect on oil prices.

Long-short funds have become increasingly attractive to investors in this volatile environment. These funds provide a way to hedge portfolios and take advantage of opportunities amid uncertainty. Risk-averse investors often consider long-short funds as a suitable option, particularly during uncertain markets. Hedge funds commonly employ this strategy. The goal of long-short mutual funds is to hold investments that are expected to outperform the market in the long run. Simultaneously, they sell "short" securities that are anticipated to decline. By identifying both upward and downward potential investments, these funds aim to increase returns while managing risk effectively.

Long-short funds often utilize leverage, derivatives, futures, or index options to optimize overall returns in any market condition. These funds mitigate short positions by maintaining long positions as well. Moreover, this strategy typically offers lower fees and flexibility without any lock-in period, although consistent monitoring is necessary.

So, it will be prudent for investors to opt for long-short equity funds in the current scenario. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three long-short equity funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000, and carry a low expense ratio.

Neuberger Berman Long Short Fund (NLSAX - Free Report) seeks to achieve its objective by engaging in both long and short positions within the global securities markets. NLSAX invests in securities of, and derivative contracts on, U.S. and foreign companies. Futures, swaps, forwards, or options are also used to increase returns and reduce risks.

Marc Regenbaum has been the lead manager of NLSAX since Feb 27, 2017. Most of the fund’s holdings were in companies like Microsoft (4%), Apple (2.9%) and Fanatics Holdings Inc (2.6%) as of Apr 30, 2023.

NLSAX’s 3-year and 5-year annualized returns are 4.2% and 5.4%, respectively. Its net expense ratio is 1.65% compared to the category average of 1.92%. NLSAX has a Zacks Mutual Fund Rank #1.

To see how this fund performed compared to others in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Boston Partners Long/Short Research Fund (BPRRX - Free Report) invests in long positions in undervalued stocks and short positions in overvalued stocks. BPRRX also invests in equity securities issued by companies of all sizes.

Joseph F. Feeney has been the lead manager of BPRRX since Sep 29, 2010. Most of the fund’s holdings were in companies like JPMorgan Chase & Co (1.4%), UnitedHealth Group Inc (1.4%) and Wells Fargo & Co (1.4%) as of May 31, 2023.

BPRRX’s 3-year and 5-year annualized returns are 13.5% and 4%, respectively. Its net expense ratio is 1.64% compared to the category average of 1.92%. BPRRX has a Zacks Mutual Fund Rank #1.

Easterly Snow Capital Long/Short Opportunity Fund (SNOAX - Free Report) invests in equity securities, such as common and preferred stocks, convertible securities, shares of other investment companies, and ETFs from companies of various sizes that focus on equity securities.

Richard A. Snow has been the lead manager of SNOAX since Aug 15, 2023. Most of the fund’s holdings were in companies like Zimmer Biomet Holdings, Inc (2.7%), WESCO International, Inc. (2.7%) and Advanced Micro Devices, Inc. (2.5%) as of May 31, 2023.

SNOAX’s 3-year and 5-year annualized returns are 15.2% and 6.3%, respectively. Its net expense ratio is 1.58% compared to the category average of 1.92%. SNOAX has a Zacks Mutual Fund Rank #2.

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